Mexico: Factors For Success
in the Mexican Equipment Finance Market
Executive Summary
Mexico has a large, fast-growing economy that represents an important emerging market for those in the international equipment financing market. Mexico's gross domestic product of US$ 1.35 trillion (purchasing power parity)1 is the 12th-largest in the world; it is the 3rd largest trading partner of the United States, and is the largest of the "N-11" countries (the "Next-11", or next biggest emerging markets after the BRICs Ð Brazil, Russia, India and China).
The Mexican equipment financing market is well-developed. Equipment leasing began in Mexico in the early 1960s, and by the end of 2007 the total equipment financing portfolio in Mexico was estimated to be approximately US$5.6 billion, the second-largest in Latin America. Motor vehicles are the predominant assets financed, although IT and industrial equipment also are widely financed.
Lessors entering the Mexican market must be legally incorporated in Mexico, and may operate as arrendadoras puras (permitted to write operating leases) or as SOFOMs (multiple purpose financial companies, permitted to write both capital and operating leases). Most lessors choose to operate as SOFOMs for tax reasons; there are over 530 SOFOMs at the time of this writing. The registration process takes approximately 45 to 60 days.
There are several important risk factors in Mexico that lessors should consider. Recourse in the event of lessee default is inefficient, and the process takes considerable time, particularly in smaller cities and towns where the judiciary is unlikely to be familiar with leasing. It takes 415 days to enforce a contract in Mexico, on average. The availability of credit information is improving Ð the Buro de CrŽdito has information on over 61% of the population Ð but thorough knowledge of the customer is paramount to avoiding credit problems.
Residual risk is an important issue in Mexico, as used equipment markets are largely undeveloped for most assets (though this is slowly changing). Currency risk might best be described as Òpredictable instabilityÓ; the peso declined steadily against the US dollar from 1995 through 2006, though, like most currencies, it has rebounded against the weak dollar in 2008.
The Mexican equipment leasing and financing market is well-established and growing. International equipment lessors considering market entry should weigh the prospective benefits of a large, vibrant market with their ability to manage the risks inherent in emerging markets, generally, and to Mexico in particular.
Table of Contents:
-
Introduction
- 2 Establishing leasing and financing operations outside the US
- 4 Key differences
- 4 Regulatory guidance
- 5 Risk management
- 6 Equipment leasing in Mexico
- 6 Market size
- 10 Lease taxation
- 17 Lease accounting
- 18 Leasing associations
- 19 Current developments
- 21 Procedures and time required
- 23 Partnership considerations
- 24 Capital requirements
- 24 Funding and currency considerations
- 25 Staffing
- 25 Systems and service providers
- 25 Geographical considerations
- 27 Market entry risk
- 29 Operational risk
- 37 Financial risk
- 40 Exit strategy risk
- 41 Conclusion
- 42 Case Studies
- 53 Appendix One - Tax Depreciation Rates
- 54 Appendix Two - Current SOFOMs
- 68 Additional International Resources